KARACHI, July 6: The State Bank on Wednesday raised treasury bills yields modestly reinforcing earlier signals that it would stabilize interest rates for economic growth but continue a slight tightening to check inflation.

The central bank kept the cut-off yield on benchmark six-month bills unchanged around 7.99 per cent but increased the cut-offs on three-month and one-year bills to 7.69 and 8.69 per cent from 7.51 and 8.45 per cent, results of the auction showed.

The SBP allowed the weighted average yields on six-month T-bills to rise to 7.98 per cent from 7.94 per cent in June. It also raised average yields of three-month and one-year bills to 7.55 and 8.46 per cent from 7.48 and 8.40 per cent respectively.

The central bank sold Rs125.7 billion worth of T-bills of all the three tenures against the target of Rs120 billion and below the market demand of Rs143 billion.

Lately the State Bank reverted to the old practice of selling all the three tenures of T-bills at the same time to attract serious bids and avoid distortions in the yield curve. It had to do so particularly because it was bent upon keeping interest rates somewhat stable after increasing them aggressively in April and May. On April 11 the central bank also raised its discount rate —after 28 long months — by one and a half percentage points to nine per cent.

Economists say the SBP move to keep interest rates a bit stable is not without justification as it wants to facilitate economic growth but they warn that a slight tightening of interest rates would be ineffective in lowering inflation to a desired level.

This sounds logical particularly in the backdrop of rising petroleum prices amidst possibility of further hikes in future.

Pakistan raised retail prices of petrol and diesel by 7.5 per cent and 9.2 per cent respectively from July 1 to Rs48.94 per litre and Rs31.74 per litre. In fiscal year July-June 2004-05 it had to raise petrol and diesel prices by 32.5 and 30.2 per cent respectively in response to soaring international oil prices. This played a key role in pushing up consumer inflation to 9.33 per cent in 11 months of the last fiscal year. Chances are that full year inflation would reach 9.4 per cent.

In the first nine months of the last fiscal year the central bank followed a gradual and measured tightening of interest rates — and it also left its discount rate unchanged to reinforce this signal. This facilitated a huge economic growth of 8.4 per cent in the outgoing fiscal year against the target of 6.6 per cent. But it kept inflation at an estimated 9.4 per cent in the outgoing fiscal year. (Exact data would pour in early next week).

For the current fiscal year, Pakistan is targeting eight per cent inflation with an economic growth of seven per cent. Whereas it is difficult to say at the beginning of the fiscal year that the country will meet the growth target “keeping inflation at eight per cent seems quite difficult,” says a well-known independent economist Dr Kaiser Bengali. He says that the central bank would find it just too difficult to keep interest rates somewhat stable for economic growth and at the same time check inflation effectively.

Dr Bengali, a former managing director of the Social Policy and Development Centre, says Pakistan is set to see a combination of both cost-push and demand-pull inflation during the current fiscal year. He says that the recent hiking of petroleum prices with more price hikes in store would continue to fuel inflation and SBP would be in a fix how to check it.

In that event, coupled with the possibility of trade deficit showing a faster-than-projected rise, both exchange rates and the current account would come under pressure. That potentially means that the foreign exchange reserve would start falling. “But my feeling is that the central bank would keep the reserve stable,” says Dr Bengali.

“The government would rather go for external borrowing as well as continue to sell state assets to earn foreign exchange,” he says — making an obvious reference to the selling of 26 per cent shares of state-owned PTCL which is going to bring in $2.6bn into the national kitty.

“But this is a short-term policy,” he says and warns that the economy may plunge into a crisis “after two three years,” if long-term solutions to economic problems are not found immediately.